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Indian Financial System

Notes rate ceiling. Besides, brokerage and commission payable by NBFC to its agents have been fixed
at 2 per cent on 1 year to 5 years of deposit.
The group on financial companies constituted under the Chairmanship of Dr. A. C. Shah, suggested
category-wise classification of the NBFCs. It further suggested that regulation should be asset-
based. It allowed the NBFC to accept deposit between 12 to 84 months. The group further
suggested for adaptation of prudential norms as far as income recognition, transparency of
accounts and provisions for bad debts are concerned.

Some of the suggestions of the group were taken up by the Government of India and liberalization
measures were undertaken in 1996. The liberalization enabled a classification of registered
financial companies in the equipment leasing and loan companies besides giving them the
benefit to enjoy the reduction of SLR from 15 per cent to 12.5 per cent.



Caselet RBI to Plug Regulatory Gaps in NBFC Biz

he Reserve Bank of India plans to strengthen the regulatory framework for non-
deposit taking systemically important non-banking finance companies as tightening
Tof the regulation for the banking sector has increased the incentives for regulatory
arbitrage by moving business to NBFCs.
Pointing out that setting up an NBFC is a more attractive option as entry point norm for
them (at present net owned funds of ` 2 crore) is low as compared to that for banks (` 300
crore) and that they are subject to relatively lighter touch regulation, the RBI, in its second
financial stability report said "some concerns remain especially in the context of the rapidly
expanding NBFC sector."
Among the reasons why regulatory gaps need to be plugged include NBFCs not being
subject to any restrictions regarding investment in the capital market thereby leading to
enhanced market risk; nor do they have any restrictions on setting up of subsidiaries,
thereby allowing setting up of possibly opaque structures with concomitant transparency
issues. Further, quality of corporate governance and management can give rise to serious
concerns, the report said.
Another concern that arises is in the context of definition of an NBFC in terms of its
"principal business" which makes it possible for an NBFC to conduct some other non-
financial activity by deploying funds in non-financial assets, leading to a lack of level
playing field vis-à-vis banks.

Multiple regulators for non-banking financial entities in the country and an entity-based
approach to regulation gives rise to possible regulatory gaps - functional activities
remaining unregulated, gaps in regulation permitting surrogate raising of public funds,
leveraged activities by entities like merchant banks, portfolio managers and brokerages
not being subject to prudential regulation. These, according to the report, will need to be
urgently addressed.
Referring to the fact that certain NBFCs, coming under the purview of other regulators,
have been exempted from the regulatory purview of the RBI subject to certain conditions,
the central bank said this has given rise to instances of certain functional activities of some
exempted NBFCs (for example merchant banks) remaining unregulated.

Source: http://www.thehindubusinessline.in

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